LM2 - Chapter 6 Flashcards
Broker duties towards principals
- follow their instructions
-act in good faith - do not sub-delegate w/o permission
- account for funds
- act with all due care and skill (E&O)
What can a principal do if a broker acts outside their authority
- ratify their actions and carry on
- ratify actions then make a claim for damages
- refuse to ratify and expose the agents to claims from the third party
How to create an agency agreement
- necessity
- agreement
-ratificiation
Duty of Care
- act within standard in the relevant market
- if the broker fails this, they have an obligation under tort law to the person breached
What could include a breach?
-Failing to:
- ensure insurnce was placed with suitable insurers
- placed on suitable terms
- understood the clients instructions
- explaining terms which can affect clients
Wholesale broker
This broker has direct contact with the insurer. There is no reason why they cannot also have contact with the client if they are the only broker in the chain,
but where there are several brokers, this term is used for the one closest to
the insurer
Retail broker
This is the other end of the chain and as with the wholesale broker; there is
nothing to prevent this broker being the only broker in the chain.
However, in a longer chain, the retail broker has the contact with the
ultimate client.
The retail and wholesale brokers could be two entirely separate broking firms,
or two firms which have a business relationship/alliance or they could be two
offices of the same broker.
Producing broker
This term is used to describe the broker (individual or organisation) which has
the contact with the client and creates or produces the work for the client
Single tied agent
A single tied agent is a representative of the insurer, not the insured.
Single tied agents are most common in a high street agency selling a number
of products from a single insurer. In this situation, the agent cannot advise the
client on other insurers’ products but is restricted to the products offered by
their principal.
These agents do not work in the London Market.
Multi-tied agent
This is similar to the single tied agent in that the principal is still an insurer.
In this case however, the agent is selling a number of different insurers’
products – but only one product per insurer. For example, they might be tied
to Insurer A for their house insurance product and to Insurer B for their car
insurance product.
As with the single tied agent, this agent cannot offer independent advice
to a client about products in the wider market and does not work in the
London Market.
Independent intermediary
This is the traditional London Market broker, which is not tied into any insurer
and works for their ultimate client who is the insured or reinsured.
This agent can take an unbiased view of the entire market (London and
elsewhere) and advise the client on the best options for their particular needs.
Surplus lines broker
For much of the business emanating from the USA, the London Market is what
is known as a ‘surplus lines market’ which means that it can only be used if the
local or ‘admitted’ market has been shown the risk but is not able or willing to
take it on.
If the London Market is used, then a licensed surplus lines broker must be used
in the intermediary chain and the details of that broker form part of the data
captured about the risk on the Market Reform Contract (MRC).
Open market correspondent
An open market correspondent (OMC) is an intermediary but is not a Lloyd’s
approved coverholder (a party holding delegated authority from a Lloyd’s
syndicate to write insurance business on its behalf). However, they introduce
business to Lloyd’s either directly or via a Lloyd’s broker on an open
market basis.
Open market means that the risk is individually placed rather than being attached to any pre-existing form of delegated underwriting agreement such as a binding authority or a lineslip.
There are certain territories where brokers/intermediaries that want to introduce
business into Lloyd’s need to have this additional level of approval by
Lloyd’s and need to be sponsored in this approval by a managing agent or
Lloyd’s broker.
The list of territories where this is required is not particularly large but it does
include areas such as Canada and Italy which are sizeable sources of business
into the market
Lloyd’s Broker
Although it is not a requirement of placing business in the Lloyd’s market, a broker who is already approved by their own regulator can apply to Lloyd’s to go through a separate accreditation process. If successful they can then call
themselves a Lloyd’s broker
Non-Lloyd’s broker
This is a broker regulated either by the UK regulator or their own home state
regulator (if overseas) but which has not obtained Lloyd’s accreditation.
Placing process - clients needs
- review the clients needs and recommend insurance options available
- consider which markets to approach to obtain quotes; also identify any unacceptable markets (security committee)
Placing process - slip
- slip and/or proposal forms are used to present risks to insurers.
- In addition there could be surveys/ loss records etc
- broker must ensure they have all relevant material from the client
Reviewing quotes w/ clients
Advise the client on differences between quotes to enable the client to make final decision
Finalising the placement
- the broker must communicate with the markets to confirm their lines
- get stamps on the slip and proportions
- check any signing down issues
Submission to Xchanging
- includes slip and LPAN (premium info) and splitting out any tax relating to the risk)
- tax varies by country so the broker needs to know if overseas could tax be paid in london or if it comes through london or if it will be paid by the insurer
Premium from client
- must rely insurers requirements to the insured in good time and warn of any issues if not paid in time
(premium payment conditions)
Documentati0on on Xchanging
Premium and risk dataa move via a system called accounting and settlement - can be uploaded to central market repository (insurance market repository).
This sends messge to Xchanging asking them to review documents, enter data onto databases and give the risk a signing number and date (unique reference)
The premium move is facilitated by Xchanging from broker to insurer
Making changes to the risk
- the broker should advise the insurer on the change to the risk by creating the endorsement paperwork
Claims - first advice
the first notification of a loss is the insured to the broker. The broker has to put together the info to present to insurers
Expert Instructions
- instruction is often made through the broker
Experts fees
Collected from the insurer by the broker but many do not provide this service
Claims negotiations
The broker must negotiate on behalf of the client - or explain to the client why the insurer is correct
Claim settlement
Insurers pay claim funds to the broker to go to the insured. The broker must pass it on quickly
Recoveries/subrogation
Insurers can subrogate after they have indemnified the insured - this is done in the name of the insured so the broker has to make sure the client cooperates
TOBAs
market agreements used to capture the ts&cs under which broker does business with various parties
Who does a broker have TOBAs with?
Insurers, clients, ‘producing brokers’. In lloyds there is a TOBA for each managing agent
Insurer TOBA - regulatory status
The broker and the insurer both warrant to each other that they are duly authorised to (in the
case of the broker) conduct what is called ‘insurance mediation activities’ (i.e. broking) and
(in the case of the insurer) insurance business and that they will tell each other should that
authorisation be suspended for any reason or they become insolvent
Insurer TOBA - Brokers authority
This includes the broker’s authority to hold premium funds on behalf of the insurer. If a
broker is granted ‘risk transfer’ by the insurer within a TOBA, any money once collected
by the broker is deemed paid to the insurer, even though it is not physically in their
bank account.
Clearly, an insurer should grant a ‘risk transfer’ TOBA only to a broker with which they are
comfortable, as the broker will be holding funds on the insurer’s behalf.
If the insurer is unsure about the broker (perhaps they are in the early stages of dealing
with them or they do not meet financial security criteria for the insurer) then a non-risk
transfer TOBA is more appropriate; this does not allow the broker to hold any funds on the
insurer’s behalf.
The UK regulator (FCA) also has a number of rules relating to client money with which any
broker regulated in the UK must comply. It is important that a broker that is not regulated
in the UK (for example because they are not UK-based) complies with their own regulator’s
rules in this regard.
Insurer toba - renumeration
sets out brokerage
Insurer TOBA - holding money/taxes
Broker has responsibility to insurer in relation to funds held but will account to the insurer in
relation to any taxes paid on insurers behalf.
Insurer TOBA - compliance
Each party will comply with their respective obligations including contract certainty and
financial crime/bribery avoidance.
Insurer TOBA - ownership/access to data
The traditional paper-based process in the London Market relied on the broker maintaining
the master placing and claims information – and updating insurers as required. Insurers
could take copies of documentation as they wished (for example they might copy the MRC/
slip when they agreed their written line) but rarely maintained a full copy of any claims file or
kept copies of every document that they might have reviewed during the placing process.
In the case of any disputes between the insured and insurers, the issue of access to
documentation sometimes arose where certain documents were held by the broker. This
was a particular issue if allegations were made that some documents were not shown to
insurers at the time of placing.
If the matter of ownership and access to data and records is clarified in the TOBA, there is
less chance of a dispute later.
Client TOBA - claims
This allows the broker to give guidance to the clients as to the requirements in the
event of a claim.
Client TOBA - disclosure
This allows the broker to put the client on notice as to their duty of disclosure during
the placing process.
Client TOBA - payment
payment for services + brokerage
Client TOBA - money holdings
This makes clear that the broker holds money on trust mainly for the client, but also
occasionally for the insurer if they have a ‘risk transfer’ TOBA with them.
The TOBA with the client should also make clear which party may retain any interest
made on funds (for example the premium) being held by the broker.
Broker renumeration - flat fee
This is payable by the client.
Under the FCA Insurance: Conduct of Business rules (ICOBS) any broking firm must
provide a client with details of any fees that will be payable before the client incurs
any fees. If, for any reason, the actual fee cannot be stated beforehand, the basis for
its calculation must be provided.
If any further fees might be incurred during the life of a policy for other activities, the
broker must also advise the client up front about them.
Broker renumeration - brokerage
The broker may earn a commission (or ‘brokerage’, as it is better known in the
London Market) for placing the business. Unlike the flat fee payment, brokerage is
paid by the insurer rather than the insured client.
In arranging brokerage, the insurer agrees that the broker can retain, or hold back,
part of the premium charged to the client when transferring it to the insurer.
The premium charged to the client is what is known as the ‘gross premium’ and
the amount received by the insurer (which is the gross premium less the brokerage
retained by the broker) is called the net premium.
If a commercial client asks the broker, they must tell them what commission/
brokerage they are receiving from the insurer. However, the broker does not have
to volunteer the information to a commercial client.
Broker renumeration - other fees
Some brokers earn additional commissions by charging a ‘collecting commission’ on
claims (usually around 1% of the claims value). This means that the insurer pays
101% of the value of the claim, but the insured receives only the 100% component.
If a broker is acting as a coverholder under a contract of delegated underwriting
authority, the insurer can pay a coverholder commission for each risk bound and may
also pay a profit commission should the business be successful.
Another example of a fee or commission that can be earned by a broker is for
specialist technical advice such as on engineering matters. Some brokers have in
house technical teams which can provide information both to the insured and to the
insurer and will charge a fee for the service.
Insurance Distribution Directive (IDD)
The Insurance Distribution Directive (IDD) came into force in the UK on 1 October 2018,
replacing the previous Insurance Mediation Directive (IMD). Although the IDD was an EU
directive it was brought into UK law by specific legislation
IDD application
- All sellers of insurance products, including those who sell directly to customers.
- Any person whose activities consist of assisting with the administration and performance
of insurance contracts. This includes those acting for insurers, for example, by performing
claims management activities. - Ancillary insurance intermediaries. However, the regime for these organisations has a lighter touch. Furthermore, an ancillary organisation will be excluded from the regulation
completely if the insurance is complementary to the goods or services provided. This is
provided that the insurance covers, for example, breakdown, loss or damage to goods or other risks linked to travel booked with the provider, and where the premium is less than €600.
Insurance distribution carve outs
- the mere provision of information on an incidental basis to a customer in the context
of another professional activity, if no further steps are taken to assist the customer in
concluding an insurance contract; - the management of claims as an insurer on a professional basis and the provision of loss
adjusting services; and - the mere provision of data and information on potential policyholders to insurance
intermediaries or insurers, if no further steps are taken to assist a customer in concluding
an insurance contract.
IDD general principles
- Distributors must always act honestly, fairly and professionally in accordance with the
best interest of customers. - All information provided by distributors must be fair, clear and not misleading.
Furthermore, in relation to any remuneration received, distributors must disclose: - the nature of the remuneration; and
- the basis for that remuneration (fee/brokerage, etc.).
FCA - risk framework
The FCA, which now regulates brokers for all aspects of their business, uses a three-pillar
risk framework looking at:
* assessment of the firm’s conduct, using the question ‘are the interests of consumers and
market integrity at the heart of how the firm is run?’;
* event-driven work which allows a flexible response to anything that arises; and
* reviewing issues and products when required
FCA - client money rules
In relation to the broker/client TOBAs, a broker must be clear about their provisions for
holding their client’s money and, for example, indicate whether they will also be holding
insurer money and who will receive any interest earned on these funds.
The FCA handbook contains some specific rules concerning client money, which are known
as the Client Assets rules (or CASS for short).
The basic concept is that the broker must arrange adequate protection in respect of all client
assets for which they are responsible. Client assets could be premium funds on their way to
the insurer (if the broker does not hold a risk transfer TOBA for the insurer), or they could be
claims funds on their way from the insurer to the client
How can brokers hold clients money
Brokers can keep client funds in one of two types of segregated account: a statutory trust
account and a non-statutory trust account. The main difference between them is the broker’s
ability to fund payments (such as the premium) out of the accounts ahead of receiving funds
into the account
Statutory trust account
A broker must not fund payments out of accounts in which they hold the client money, if
those accounts are statutory trusts. The trust in this case exists only for client money which
the broker has actually received.
Non-statutory trust account
A broker may only fund payments out of accounts in which they hold the client money, if they
are defined as non-statutory trusts. In this case, the trust is not set up by operation of any
particular law but by the broker declaring the account to be a trust account into which client
money will be placed. For this type of account, if the broker wants to extend credit to the
client then they are at liberty to do so, but should have systems and processes in place to
ensure that the client pays them eventually.
If they use non-statutory trust accounts, a broker could pay the claim to their client before the
insurer pays the money to the broker
Data protection act 2018
The DPA 2018 came into effect in the UK in May 2018, to coincide with the implementation
of the EU GDPR. It sets out the framework for data protection law in the UK.
DPA 2018 elements
Main elements of the DPA 2018:
* Ensuring that sensitive health, social care and education data can continue to be
processed, to ensure confidentiality in health and safeguarding situations.
* Restricting the rights to access and delete data where there are legitimate grounds for
doing so (e.g. for national security purposes).
* Setting the age from which parental consent is not needed to process data online.
* Providing the Information Commissioner’s Office (ICO) with enhanced powers to regulate
and enforce data protection laws
Who does the UK GDPR apply to?
The UK GDPR applies to the United Kingdom, including Northern Ireland, and replaced the
previous European Union (EU) GDPR.
The UK GDPR places legal obligations on controllers and processors. For instance, firms
are required to maintain records of personal data and processing activities, and a firm has
significant legal liability if it is responsible for a breach.
Controllers are not relieved of their obligations where a processor is involved. The UK
GDPR places obligations on controllers to ensure their contracts with processors comply
with the regulations.
What information does the UK GDPR apply to?
It applies to personal data of an identified living individual. However, the definition of
personal data reflects changes in technology and in the way in which information is
collected. It makes it clear that information such as an online identifier, e.g. an IP address,
can be personal data.
It also applies to both automated personal data and to manual filing systems where
personal data is accessible according to specific criteria. This is similar to the EU GDPR
but wider than the definitions in the previous UK data protection legislation. It could include
chronologically ordered sets of manual records containing personal data. Personal data that
has been anonymised, such as where it is key-coded, can fall within the scope of the UK
GDPR depending on how difficult it is to attribute such data to a particular individual.
GDPR principles
Under the UK GDPR, the data protection principles set out the main responsibilities for
organisations. The most significant addition is an emphasis on accountability. The UK GDPR
requires firms to show how they comply with the principles – for example, by documenting
the decisions they take about a processing activity
Lawful processing - consent
Consent must be a freely given, specific, informed, and unambiguous indication of the
individual’s wishes. There must be some form of positive opt-in; consent cannot be
inferred from silence, pre-ticked boxes or inactivity, and firms need to make it simple
for people to withdraw consent. Consent must also be separate from other terms and
conditions and be verifiable. Where a firm relies on someone’s consent, the individual
generally has stronger rights, for example to have their data deleted.
Lawful processing - contract
The processing is necessary for a contract a firm has with the individual, or because they
have asked the firm to take specific steps before entering a contract
Lawful processing
- Legal obligation
The processing is necessary for a firm to comply with the law (not including contractual
obligations). - Vital interests
The processing is necessary to protect an individual’s life. - Public task
The processing is necessary for a firm to perform a task in the public interest or for its
official functions, and the task or function has a clear basis in law. - Legitimate interests
The processing is necessary for a firm’s legitimate interests or the legitimate interests of
a third party, unless there is a good reason to protect the individual’s personal data which
overrides those legitimate interests.
UK GDPR - right to be informed
- Individuals have the right to be informed about the collection and use of
their personal data. - This must be provided to individuals at the time the personal data is
collected from them.
UK GDPR - right of access
- Individuals have the right to find out if an organisation is using or storing
their personal data. - They can exercise this right by submitting a subject access request
(SAR) to the organisation concerned. - A company should respond to an SAR within one month; it can take an additional two months in certain circumstances.
UK GDPR - right to rectification
- Individuals have the right to have inaccurate personal data rectified or
completed if it is incomplete. - An individual can make a request for rectification verbally or in writing.
GDPR - right to erasure
- Individuals have the right to have their personal data erased, also known as
‘the right to be forgotten’. - The right is not absolute and only applies in certain circumstances.
GDPR - right to restrict processing
- Individuals have the right to request the restriction or suppression of their
personal data. - This is not an absolute right and only applies in certain circumstances.
- When processing is restricted, an organisation is permitted to store the
personal data, but not use it.
GDPR - right to data portbility
This allows individuals to obtain and reuse their personal data for their own
purposes across different services.
GDPR - right to object
- This gives individuals the right to object to the processing of their personal
data in certain circumstances. - Individuals have an absolute right to stop their data being used for
direct marketing.
GDPR - Rights in relation to
automated decision making
and profiling
- An individual has the right not to be subject to a decision based solely on
automated processing. - Processing is ‘automated’ where it is carried out without human intervention
and where it produces legal effects or significantly affects the individual.
GDPR - accountability and governance
Accountability is one of the data protection principles under the UK GDPR. Firms are
expected to put into place comprehensive but proportionate governance measures. Good
practice tools such as privacy impact assessments and privacy by design are now legally
required in certain circumstances. Practically, this is likely to mean more policies and
procedures for organisations, although many will already have good governance measures
in place.
